Divorce and Spendthrift Provisions in Irrevocable Trusts in Massachusetts Post the Appeals Court Decision in Pfannenstiehl v Pfannenstiehl August 2015
On August 27, 2015, the Appeals Court decided the above entitled case. The facts in the most basic terms are as follows: A divorce action is filed in September of 2010 by the husband. In 2004, the husband's father established a trust for the benefit of the husband and his two siblings as well as future beneficiaries. The funding of the trust came mainly from the operation of for-profit colleges by the husband's father. This trust was a multi-million dollar trust. The trust had a spendthrift provision which generally will protect the trust from claims of third parties and creditors. The trust also had a provision that the money could be disbursed to the beneficiaries for the " comfortable support, health, maintenance, welfare and education of each or all members of such class".
Some additional important facts noted by the Court were that the trust had made an outright distribution to the husband of $300,000.00 in 2008 and then monthly payments of between $20,000.00 and $65,000.00 almost every month to the husband and his siblings from April 2009 to August 2010. In August 2010 one month before the filing of the divorce by the husband, the trust made its last payment to the husband. The trust continued to pay $20,000.00 a month to his siblings every month throughout the divorce proceedings in 2012. The Court also made note that the husband worked as an "assistant" bookstore manager at one of the college bookstores and earned a salary of $170,000.00 a year. The court commented that the salary was a "handsome and inflated salary" and that it flowed from his family relationship.
At trial, the husband sought to exclude the trust from consideration by the Court in the marital estate as a marital asset and income . His chief argument was that the trust had a spendthrift provision and therefore the trust should be isolated from the marital estate under the spendthrift isolation theory.
The Appeals Court noted five important factors in upholding the trial judge's finding that the trust should be included in the marital estate. First, the trial judge appropriately included, valued and divided the trust assets. Pfannenstiehl v Pfannenstiehl, 88 Mass. App. Ct. 121 at 127. Second, the trust was not administered impartially by the trustees. "To the contrary, the judge expressly found that as the divorce began, the proverbial family wagons circled the family money" Id at 129. Third, "it is clear that this cutoff of the distributions from the 2004 trust only to the husband and just on the eve of divorce was a deliberate manipulation to erase a major component of the husband's annual income and to silence his interest in the trust--for a convenient time while the divorce was ongoing" Id at131. The court also indicated that the husband would likely resume distributions from the trust as soon as the divorce was over. Fourth, there was substantial distributions before the divorce then none to the husband after he filed. The court found that basic fairness and common sense requires that the asset be included as the husband cannot enjoy the asset while neglecting to pay support for persons he is legally obligated to support. Lastly, the Court found that the trust provided for payments for support, health, maintenance, etc which provide an ascertainable standard for distribution. The Court went on to indicate that if there is an ascertainable standard for distribution to beneficiaries, then the trust should be included in the marital estate for consideration and division in the divorce.
Other important factors the Appeals Court considered in upholding the trial judge's decision to include the husband's interest in the trust in the marital estate were the fact that the trust has been making regular monthly substantial payments to the husband. The parties had used those payments to maintain their lifestyle. The underlying negative view of the husband's conduct by the trial judge, by the trust stopping payments to him on the eve of the divorce. Finally, it appeared that as soon as the divorce would be concluded the husband would again begin to receive the payments.
It seems apparent from the reading of this case that even if you have an irrevocable trust with spendthrift provisions which may ordinarily be considered by the Court in its decision to exclude a trust from the marital estate, the Court will also scrutinize the conduct of the parties and trust and then apply the all inclusive equitable standard in its decision relative to inclusion or exclusion of a trust in a divorce.